The bull is scraping his hooves and preparing to charge into 2006, according to Fisher Investments' market outlook report.
Economic responses to recent terrorist attacks, pandemic natural disasters and rising energy costs, underscore the strength of the market, proving, according to the report, "Bull markets don't cower."
"The stock market barreled past tragic hurricanes, deadly terrorist bombings, Supreme Court jitters, Fed tightening and rising oil prices," reads the report, titled "The Fog Begins to Lift." "Even media histrionics failed to dampen stocks' forward momentum. The economy is in better shape than most believe and [pessimism] seems to have bottomed with a strong third quarter."
While bearish market-watchers envision problems for 2006, Fisher, based in Woodside, Calif., discounts warnings of a catastrophic combination of high energy costs, recovery from Hurricane Katrina and other natural disasters, terrorist attacks and political shake-ups at home or abroad. With respect to the devastation caused by Hurricane Katrina, Fisher says that while it sympathizes with the victims directly affected by the storm, the loss of New Orleans' economic engine represents a dip of only about 1% of the Gross Domestic Product (GDP). Louisiana, Mississippi and Alabama combined represent only 3% of the national GDP. Reconstruction may cost tens of billions of dollars, but it will also generate economic benefits, creating both short- and long-term jobs, attracting entrepreneurs and ultimately creating a stronger regional economy. "Even the most pessimistic analysis concludes only a fractional slowdown in overall U.S. economic growth in the coming year," the report notes.
Likewise, bombings in London last July rattled investors, but stocks rallied. If attacks were to occur on American soil, Fisher suggests the results would be no different, and offers New Orleans as proof. "A prominent U.S. city was made largely uninhabitable for an extended period of time. The fact that U.S. stocks moved sharply higher in the weeks that followed speaks to the U.S. economy's resilience," Fisher says.
These two events, combined with predictions of oil prices hitting $70 per barrel, caused many naysayers to predict stocks would fall, but in fact, they rallied.
When it comes to oil, the general public draws a false correlation between rising costs and falling stocks, and for this, Fisher blames the media. "We remember the day when oil prices sink and stocks rally, but conveniently forget the next day when they move [upwards] in lockstep," the report says. "Rising oil prices in recent years have generally been a reflection of economic strength and have had virtually no short-term statistically significant causal relationship with stocks," says Fisher, "It's a cognitive error that plagues human beings."
Oil supply crises, like the storied shortages of the 1970s, Fisher reports, are unlikely to recur. "Any supply disruptions from recent natural disasters can be repaired and should not last long enough to cause investors material concern," the report added.
What does impact prices, however, according to Fisher, is the swell and shrink of the global economy. Growing markets demand more fuel, driving prices upward, but that, too, is a positive sign for investors. Cheap labor and rapid industrial growth in China and India keep global inflation low by producing inexpensive consumer goods and market opportunities. At home, U.S. corporations continue to outperform expectations, while low long-term interest rates have helped them grow through acquisitions and stock repurchases. These also are signs that returns in the future will remain strong.
On an earnings-per-share basis, the Standard & Poor's 500 rose 13% in the first quarter of 2005. Projections suggest the first quarter of 2006 will do even better, with a 15% return, Fisher notes. "The fading fog over the stock market should drive capital to seek out higher yields," the study purports.
International markets promise to continue to deliver strong returns, too, as global politics bode well for a bullish 2006. Angela Merkel, the newly elected German chancellor, is a sign that Germans want to shirk Gerhard Schroeder's socialist ethos. Newly opened markets, like Poland, offer great potential for new growth. Finally, the re-election of Prime Minister Junichiro Koizumi in Japan is a stabilizing event that positions the island nation for an economic rebound, after its devastating crash more than a decade ago. "Reforms will come slowly but surely," Fisher predicts.
Not so fast, counters John Lekas of Leader Capital Management in Portland, Ore. Lekas reminds investors that it's American dollars they are putting into foreign funds, and unless the dollar rallies, the actual returns investors realize may be smaller than they appear. American investors who hear about rapid expansion in India and China are too fast to invest in international funds. "Most high-yield funds this year are excessively weighted in foreign issues," said Lekas, "and it definitely affects their performance negatively."
As for oil, while the stock market may not be swayed by oil prices, many companies' basic operations are-severely. "Oil is traded in dollars. If the dollar drops 50%, the price of oil goes up 50%," said Lekas. If the dollar drops and the price of oil continues to climb, the disparity can be crippling.
Fisher's report does acknowledge some risks, although the report also offers mitigating factors for each.
Ben Bernake's takeover as chairman of the Federal Reserve from current Chairman Alan Greenspan may cause some short-term fluctuation, but it will most likely be temporary.
A proposed 27.5% tariff on imports from China introduced by Senators Charles Schumer (D-N.Y.) and Lindsay Graham (R-S.C.) appears dead, but the protectionist rhetoric remains a threat, as trade barriers smother economic growth and hobble productivity. Fisher confidently asserts, however, that the Bush Administration understands the threat, and would veto any such legislation that might pass in Congress.
Finally, and perhaps most menacing, is the threat of tax increases. Capital gains, and dividend and income tax trims passed in 2003 all expire between 2008 and 2010. Increased Federal spending on the wars in Iraq and Afghanistan, and domestic disaster relief in the wake of Hurricanes Katrina and Rita may pose political obstacles to making these cuts permanent, or even renewing them. Allowing rates to return to pre-2003 levels will hobble investors, Fisher reports.
Despite these concerns, Fisher remains optimistic for the end of the fourth quarter and the start of the New Year. "Equity investors should be rewarded as stocks continue to climb the wall of worry," Fisher concludes.
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